Refer to Exhibit 14-4.Using the effective interest method interest expense at the end of the first year is

A) $21, 000
B) $19, 518
C) $18, 000
D) $16, 730

Question

Refer to Exhibit 14-4.Using the effective interest method interest expense at the end of the first year isA) $21, 000B) $19, 518C) $18, 000D) $16, 730

Alexander Lombardo · Accepted Answer

Final Answer : B, Explanation :  The effective interest rate is calculated as follows:Effective interest rate = (Total interest payments / Total bond principal) = (60,000 / 300,000) = 0.2 or 20%Interest expense for the first year = Book value of bond at beginning of year x Effective interest rate= 300,000 x 20% = $60,000However, only $50,482 was actually paid in cash (7% of the initial bond principal). Therefore, the interest expense recorded in the first year will be the cash paid ($50,482) plus the amortized discount ($8,036), which is $58,518.The interest expense ($58,518) is the amount that will be recorded at the end of the first year, so the answer is B) $19,518.

Refer to Exhibit 14-4.Using the effective interest method interest expense at the end of the first year is

A) $21, 000
B) $19, 518
C) $18, 000
D) $16, 730

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